China’s virtual telcos will finally get the official green light, but it might already be too late

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This year, China might finally issue the official operator licenses for “virtual telecom providers.” Three years back, the news would have made a splash throughout the whole internet industry, but now few seem to care.

At a 2017 year-end industry conference, China’s Ministry of Industry and Information Technology (MIIT) announced (in Chinese) that all qualified private virtual telecoms will formally receive an official license to resell internet access in 2018. These virtual operators do not maintain a network infrastructure but rent wholesale services like roaming and text messages from China’s three dominant telcos—China Mobile, China Unicom, and China Telecom.

When the MIIT started to pilot virtual telecoms in several Chinese cities back in 2013, the country was psyched about BAT and the likes taking down the big three telcos, who are notorious for their lousy service (China Unicom, China Telecom) and opaque billing (China Mobile). Three years in, the official licenses still haven’t arrived, and many of the 42 piloted virtual operators are struggling to survive.

Neither the delay nor the weak performance is surprising. All three entrenched telcos are state-run firms, which are, in turn, directed by the MIIT along with China’s National Development and Reform Commissions, a macroeconomic governance agency, and the Ministry of Finance. It is thus not in the best interest of policymakers to boost these virtual network operators—although the pilot project was, on paper, part of China’s reform to invite competition into the three-carrier oligopoly.

One unintended consequence of an ambivalent government attitude is the rampant abuse of virtual networks by scammers. China has required that all mobile phone users register with their real names, but regulation loopholes exist for virtual telecoms. Under the pressure to meet sales KPIs set by policymakers, virtual operators have loosened the registration process for new subscribers, many of whom turn out to be fraudsters.

As of today, virtual telecoms had attracted about 50 million subscribers and take up 3.5% of the total market, but it’s no secret to Chinese people that many of those mobile numbers, which start with “170” and “171”, are owned by scammers. The project is also losing steam among China’s tech titans, who are increasingly turning to partner with the old big three telcos instead. King Card (大王卡), a mobile internet plan released by Tencent with support from China Unicom, has attracted 50 million subscribers in just a year.

The tarnished reputation of “170” and “171” is likely to stay. Even if the market is officially open for real competition and receives stricter oversight, few Chinese users will likely switch to these virtual networks. For one, the price incentives of virtual operators are no longer enticing as the big three have significantly lowered their fees in recent years as well. The more agonizing part of switching networks is that users are unable to keep their original number, which has probably been tied to a myriad of personal assets from bank to WeChat accounts.

The good news is, China is also in talks to roll out the “transfer network, keep your number” (our translation of 携号转网) initiative, and the MIIT has set a hard deadline of 2020 (in Chinese) for implementation. Even if China’s tech companies can’t wrest network service away from the telco’s grasp, the government is ready to take aim at state-owned enterprises. In August, some of China’s largest tech companies—including the BAT trio—poured a total of $11.7 billion in China Unicom as part President Xi Jinping’s “mixed ownership reform” to freshen the bloated state sector with private capital. It took a long time for China’s telco market to get here, but market forces might finally have their say.